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Australia-China Services Trade: Opportunities and Challenges of a Free Trade Agreement

Beijing, 24 April 2006

Session Two: Architecture, Engineering and Construction

Presentation by Mr Allard Nooy, Director China, Leighton Asia (Northern) Limited

Ladies and gentlemen.  I’m delighted to be here today to contribute to this important forum, and I hope that the views that I share with you may help in some small way to facilitate the smoother transfer of the services industry between our two great countries.

I would like to provide the perspective of an international construction and mining contractor based on our experience operating in China.

Before I start, it’s appropriate that I give you a brief overview of the Leighton Group.

Some of you may have already heard of Leighton. For the benefit of those that haven’t, the Leighton Group is Australia’s largest contractor and project developer. The Group operates throughout Australia, Asia and the Pacific through a number of separate operating companies. It currently employs over 23,000 people and last year boasted revenue of over US$5.8 billion. As at the end of December 2005, the Group had over US$11 billion of work of work in hand.

Leighton has been operating in Asia for over 30 years since the Hong Kong office was opened and in that time have completed well over 100 major contracts. We are now firmly ensconced as one of the Territory’s leading contractors.

Our activities to date in mainland China have been somewhat more sporadic.  We commenced our first project here in 1993, and have since completed five key projects there. It is important to note that the majority of these were undertaken prior to China’s ascension to the WTO.

Opportunities for the Australian Construction Industry to contribute to China’s development

As a generally conservative company, to date we have found China a difficult market
to crack.

The Australian experience in large infrastructure development projects, Public Private Partnerships, design, build, finance and operate of infrastructure could assist China in its rapid economic development.  In addition Australian companies operating in China would be able to transfer expertise, technology and skills.

We are hopeful that with some adjustments to the current regulations, the opportunities for Australian companies like ours to contribute to the inexorable growth of China will dramatically increase. We believe that the Australian construction industry has a lot to offer and we would welcome the opportunity to be a part of it.

For the Australian construction industry there are currently significant opportunities in China in infrastructure-related construction, including rail systems, tunnels, and ports, as well as resource-based construction, including mining, large-scale oil and gas projects, and alumina and nickel refining projects.

Somewhat ironically, China’s post-WTO construction and design regime has introduced some significant obstacles to foreign companies such as ours.

These include:

Some of you may be aware of the Closer Economic Partnership Arrangement (CEPA) forged between Hong Kong and Mainland China. The arrangement has lowered the barriers for Hong Kong-based companies aiming to operate in China,..

I suggest the negotiators for the FTA have a look at CEPA and the concessions it has granted to the Hong Kong construction industry.

Construction

Prior to China’s entry into the WTO foreign construction, companies could apply for construction licences on a project to project basis.  However, in line with China’s post WTO construction regime, foreign companies are no longer allowed to work on a project by project basis.

We are permitted to establish WFOEs, cooperative joint ventures and equity joint ventures to undertake construction work in China under Decree 113.

Such entities must be appropriately qualified under the domestic construction qualification regime.  This regime is based on a complex grading and categorisation system which is different for construction enterprises working in different industries.  For each grade and category enterprises must establish that they meet certain requirements regarding experience, personnel and registered capital.

New entrants to the Chinese construction market are generally required to commence operations at the lowest grade for each category in which they qualify (although we understand that in practice there have been exemptions to these requirements in particular for Hong Kong construction companies which applies under CEPA II).  As such, Australian contractors in China are likely to hold qualifications at the lower grades.
Construction WFOEs in China are also restricted to undertaking certain types of projects.  Reference is made to Article 15 of Decree 113.

Specifically, construction WFOEs are generally limited to undertaking projects that are either wholly or partly financed by foreign investment or cannot be undertaken by Chinese construction enterprises for technical reasons.  With respect to Sino-foreign joint construction projects, construction WFOEs are restricted to undertaking projects in which foreign investment accounts for 50% or more of the total investment.

CEPA certified Hong Kong construction companies are exempted from foreign investment restrictions when undertaking Sino-foreign joint construction projects.

We believe that there are strong grounds for arguing that Australian-invested construction WFOEs should be permitted to undertake work for wholly Chinese-invested projects in the mining and metals, power, oil and gas and other infrastructure and resource-based sectors.

Working in Consortiums

Two or more construction companies are permitted to undertake construction work in China as a consortium.  However, where two or more companies with different qualification grades jointly undertake a construction project they are currently limited to operating within the business scope of the company with the lowest qualification grade in accordance to Article 19 of Decree 113.

An exemption for Australia from the consortium qualification restriction outlined above would allow Australian and Chinese contractors working in a consortium to contract for work within the higher of the two qualification grades.

Residency Requirements for Foreign Personnel

Foreign personnel employed by foreign-invested construction companies are required to be resident in China for three months each year in accordance with the Implementing Measures Concerning Construction Industry Qualifications for Foreign-Invested Enterprises, issued April 2003 (“Decree 73”).  This creates an unnecessary cost for foreign-invested construction companies.

The Supplement to CEPA signed on 27 October 2004 exempted Hong Kong personnel employed by certified Hong Kong construction companies from this requirement (it is yet not clear whether this is applicable to HKSAR (spelt what this stands for) based personnel or just HKSAR nationals).

Australia has a track record of working with Chinese construction firms and passing on our skills and know how.  An exemption for Australia from China’s residency requirements for foreign-invested construction companies would allow us to do more of this in the construction sector in China.

Project Management

The regulatory landscape applicable to the provision of project management services in China has recently changed.  Prior to December 2004 project management was largely unregulated in China.  Foreign companies wishing to provide project management services could do so without having to obtain a formal qualification from the Ministry of Construction (MOC).  This situation changed with the introduction of the Trial Measures Concerning Construction Project Management, in December 2004 (“Circular 200”).  Circular 200 stipulates that companies wishing to provide project management services in China must be qualified under one or more of the following six construction-related regimes, respectively: (1) construction, (2) design, (3) costing, (4) tendering, (5) supervision or (6) surveying.
The only avenue currently available for WFOEs wishing to provide project management services in the PRC is to be licensed as a construction company under Decree 113 (or, exceptionally for some CEPA eligible companies, as a design company under Decree 114).  There is currently no regulatory path for Australian-invested companies to apply for and obtain qualifications for construction supervision, project cost-consulting, tendering agency or surveying services.

The MOC has indicated that it does not intend to introduce a specific project management qualification in the future.  Australian-invested construction companies wishing to offer project management services in the PRC are therefore required to qualify under Circular 200 in one of the listed disciplines.  Qualifying as a construction company under Decree 113 is simply not a realistic option for many Australian companies in the project management sector.  The high registered capital requirements make such an option commercially unfeasible.  Australian companies therefore need to qualify in one of the other disciplines.

Conclusion

There are currently significant opportunities for the Australian construction industry in China.  Australian companies wishing to participate in the Chinese construction market are, however, facing a number of market access issues.

The Australian services industry, and the construction industry in particular, have a lot to contribute to China and any such arrangement that facilitates the smoother transfer of services between the two countries will significantly benefit both economies.

Thank you.

Leighton Projects Consulting (Shanghai) Limited – Beijing Office
Contact person: Mr Ouyang Jun

Unit 406 Cheng Yuan Plaza
No.19 Jian Hua Road,
Jianguomenwai Street
Chaoyang, Beijing100022

Mobile: +86 139 1026 3152
Work: +86 10 6568 7216
Fax: +86 10 6568 7226
E-Mail: jun.ouyang@leightonasia.com

Leighton Projects Consulting (Shanghai) Limited – Shanghai Office
Contact person: Ms Grace Zeng

19th Floor, Suite1915
China Merchants Tower
161 Lujiazui Road East
Pudong Shanghai 200120

Mobile: +86 1376 4309 166
Work: +86 21 5882 3345
Fax: +86 21 5882 4029
E-Mail: grace.zeng@leightonasia.com